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Demand Shocks and Intertemporal Coordination: A Two Country Model

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  • Francesco Saraceno

Abstract

The effect of demand shocks is studied within an economy characterized by a temporally articulated production structure and bound by rational agents. Hicks' (1973) model is extended in order to include trade between two economies with demand links. This allows to tackle issues as the transmission of shocks and the coordination of monetary policies. By means of numerical simulations the author shows that because of irreversibilities, temporary demand shocks trigger disequilibrium dynamics with permanent effect on the economy. Market imperfections, namely a certain degree of wage and price stickiness, prove necessary to avoid the implosion of the system. An accommodating monetary policy, by softening financial constraints, is effective in stabilizing the economy. When considering trading economies, a certain degree of openness has positive effects, and independent monetary policies may in some occasions be desirable.

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Bibliographic Info

Article provided by IUP Publications in its journal The IUP Journal of Monetary Economics.

Volume (Year): III (2005)
Issue (Month): 2 (May)
Pages: 51 - 75

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Handle: RePEc:icf:icfjmo:v:03:y:2005:i:2:p:51-75

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Cited by:
  1. Michel Quéré & Jean-Luc Gaffard, 2005. "Appendix 4 : Relocation : What Matters ? Competition or/and Co-ordination," Sciences Po publications info:hdl:2441/5062, Sciences Po.
  2. Catherine Mathieu & Henri Sterdyniak, 2005. "International relocation and deindustrialisation: some French perspectives," Sciences Po publications N°2005-09, Sciences Po.
  3. Georges Pujals & Guillaume Daudin & Michel Quéré & Catherine Mathieu & Sandrine Levasseur & Jean-Luc Gaffard & Henri Sterdyniak, 2005. "Competition from emerging countries, international relocation and their impacts on employment," Sciences Po publications 2005-9, Sciences Po.
  4. Guillaume Daudin & Jean-Luc Gaffard & Sandrine Levasseur & Caterine Mathieu & George Pujal & Michel Quéré & Henri Sterdinyak, 2005. "Competition from emerging countries, international relocation and their impacts on employment," Documents de Travail de l'OFCE 2005-09, Observatoire Francais des Conjonctures Economiques (OFCE).

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